A Robot-Friendly Way to Raise the Minimum Wage

The New York Times reported over the weekend that the Obama administration is starting to throw its support behind a Senate proposal to raise the minimum wage to approximately $10 per hour. That would be higher than the $9 Obama called for in his State of the Union address, and would nearly match the high water mark of the historical minimum wage, adjusted for inflation.

Buried in the article, however, was a troubling detail:

Democratic senators from more conservative states favored an increase to $9 an hour, but including the expensing provision was enough of a sweetener to bring them behind the $10.10 proposal.

Under that provision, small businesses would be able to deduct the total cost of investments in equipment or expansions, up to a maximum of $500,000 in the first year. Including such a provision helped persuade the Senate to vote overwhelmingly in favor of the last two minimum wage increases

A hike in the minimum wage would disproportionately impact small businesses. It would make sense to couple it with a pro-labor reform that would disproportionately benefit small businesses – such as a permanent cut in the employer portion of the payroll tax (offset by an increase in taxes on consumption, such as a VAT or carbon tax).

Unfortunately in the Senate proposal outlined above, the small business tax cut is not a cut in the employer portion of the payroll tax, or some other salutary benefit to ease the effects of the wage hike. Instead, as Jordan Weissmann noticed over at The Atlantic:

In other words, this bill would make it more expensive to hire workers and cheaper to buy the technology to replace them. From a political horse-trading perspective, this makes total sense. From a job-creation perspective, it’s a little alarming.

Increased automation is one of an employer’s options in deciding how to respond to a minimum wage hike. After all, robots don’t receive wages (yet), so one of the biggest obstacles is the large upfront outlay for purchasing and installing a robot in that (presumably) low-skill worker’s place. What the Senate proposal does, and apparently has done twice previously in minimum wage hikes, is to explicitly subsidize that outlay, to the cool tune of $500,000 in the first year. While one would hope that the increased productivity from automating certain tasks would be beneficial for the economy as a whole, that will be little consolation to any replaced workers.

At stake here is not whether we should use robots and approve of ever-increasing automation in out economy. That’s another discussion for another day. What’s at issue here is whether we should be deliberately pairing an incentive to one of the more potentially damaging responses to a minimum wage increase with that very increase. It seems unwise to drop in a double dose of nudges toward the elimination of low-skill jobs in a low-skill job market already under great stress.

Well, small businesses are dealing with the reality that their big box competition already IS super automated, with the best robots etc that deep pockets can buy.

That said, I disagree with the presumption that a raise in the minimum wage will disproportionately harm small businesses. Is there any evidence whatsoever that small businesses tend to rely on minimum wage workers more than larger businesses?

My sense is that they may be less likely – that small businesses don’t have the luxury of making workers interchangable parts who can be tossed aside and replaced easily – and thus that they already tend to pay higher than minimum wage to their employees because retention is much more critical for a small business.

Small businesses can’t have easily replaceable workers in single-task roles that have virtually no training time, but rather tend to need people who can fill multiple roles, and require multiple skills, and would take a significant toll on business to hire/train someone new.

My guess is that there won’t be significant job losses among small businesses with these technology investments, but that those investments will allow small businesses to leverage their existing employees to do more and earn more.

“In almost any case, a minimum wage puts the poorest out of work and onto government assistance.”

Yep, keep creating more unemployment, that’s a good recipe for a healthy economy. It’s still pretty basic, if you make it illegal to work below a price, all such potential work at that price will cease to exist, at least in the legitimate marketplace.

“My sense is that they may be less likely – that small businesses don’t have the luxury of making workers interchangable parts who can be tossed aside and replaced easily – and thus that they already tend to pay higher than minimum wage to their employees because retention is much more critical for a small business. ”

Well, that may or may not be true depending on the region in the country. For some regions, $10 an hour goes much further than say NYC or Boston. Same thing with $100,000 a year.

@Johann: In almost any case, a minimum wage puts the poorest out of work and onto government assistance.

Are you aware that except for dependent kids, pretty much everyone who is working for minimum wage today is already on government assistance – including food stamps, and medicaid? The government assistance just ends up being a taxpayer funded subsidy for the employer who is not to paying a living wage to their employees.

@ck Well, that may or may not be true depending on the region in the country. For some regions, $10 an hour goes much further than say NYC or Boston.

You seem to be talking about what standard of living the minimum wage might provide – I’m talking about businesses having to compete to retain workers.

The larger a business is, the easier it is to standardize jobs so that the minimum amount of training is necessary. The less training is necessary, the easier it is to replace any given worker … ergo, lower wages, since there’s less incentive to retain your existing workers.

“In almost any case, a minimum wage puts the poorest out of work and onto government assistance.”

People love to use this argument against the minimum wage, but I have never seen any actual evidence to back this up. It is based on the unspoken assumption that an employer starts by deciding how big he wants his payroll to be, then divides that number by the wage rate he wants to (or has to) pay, with the result determining how many employees he will hire.

The simple reality is that any competent employer hires exactly the number of employees he needs to conduct his business (no more, no less), and pays them exactly as much as he needs to (no more, no less). Any employer who does otherwise, either by carrying more employees than he needs or by not having enough, is likely to end up out of business. And while he may rant about how his failure was all because of the minimum wage, or the unions, or the EPA, or OSHA, it will really be his own incompetence that did it.

balconesfault
Your guess is wrong because technology improvements are actually becoming more usable by even the smallest of enterprises that only the mega corporations could have utilized in the past. Automated food vendors, burger flippers etc. these are no longer science fiction or expensive curiosities, these are now real alternatives to overpaid staff.

Say … automated food vendors. Where these are profitable, they’re already being put out there by larger businesses with plenty of investment capital … so if there’s a significant marketplace of people more inclined to buy food from a machine than a person, they already have that opportunity. The small business tax credit, nor the minimum wage, won’t affect that.

Automated burger flippers? If that ends up making a small burger joint more competitive, and they stave off McDonalds/Burger King or even any of the newer high-end burger joints that are popping up … that ends up being good for both employment and local wealth retention.

And again, I’ll argue that McD’s is much more likely to have a kitchen staff filled with minimum wage/high turnover employees, than the local burger joint that’s been family run for the last 20 years.

I believe you are right that minimum wage workers are already on government assistance. But raising the minimum wage still results in putting many of them out of work which makes the situation worse. Either their total income is decreased, or the government assistance increases. Its unfortunate, but the low skilled jobs have largely left this country, and so we need workers with more skills and education.

@balconesfault: “Is there any evidence whatsoever that small businesses tend to rely on minimum wage workers more than larger businesses? My sense is that they may be less likely…”

It is always amazing to me that while actually ON the Internet, people rely on their “sense” to answer such questions. It took about 5 seconds to find this:

“Contrary to the rhetoric of organized labor and its allies, the vast majority of people earning the minimum wage aren’t working at large corporations with 1,000 or more employees. Roughly half the minimum-wage workforce is employed at businesses with fewer than 100 employees, and 40% are at very small businesses with fewer than 50 employees.” — http://online.wsj.com/news/articles/SB10001424052702304655104579163880944640994

@Ken T: “The simple reality is that any competent employer hires exactly the number of employees he needs to conduct his business (no more, no less)”

There is no “number of employees needed” to run a business: other things can always be adjusted. The owner can work more, have his / her spouse come in, switch to self-service, automate, and a thousand other things. How many workers are “needed” depends almost entirely on how much they cost! (You might notice that when, say, labor costs were much, much lower and machines cost more, middle class families had multiple servants, whereas today they have a dishwasher, washing machine, etc. There just is no such thing as a “needed” number of employees.)

If the working class were represented in Washington there would be no need for a minimum wage and much less need for welfare. Workers would negotiate their compensation through collective bargaining. Increases in productivity would result in higher wages and tax receipts. What we need is a Labor Party. The working class needs work and wages. The D’s and R’s give us war and welfare.

I’m sure that there is a minimum wage increase that would in fact kill jobs … but it’s probably politically impossible to pass such an increase. The numbers we’re playing with will result in marginal increases in the prices of commodities that are already relatively inexpensive, and any company that cuts jobs because of the minimum wage increase is likely just to lose market share to more aggressive competitors.

McDonald’s franchisees each hire their own employees and establish their own terms and conditions of employment

In essence, a large majority of those franchisees are “small businesses” … but the reality is that keeping wages low has primarily benefited the parent corporation, which has steadily been raising rent and fees on their franchisees in recent years, taking advantage of the extra profits that our below-living wage minimum wage helps generate. The parent companies keep close tabs on exactly how much they can extract from their family of “small businesses” they license, and the minimum wage is directly factored into that.

There is no “number of employees needed” to run a business: other things can always be adjusted. The owner can work more, have his / her spouse come in, switch to self-service, automate, and a thousand other things. How many workers are “needed” depends almost entirely on how much they cost!

A great number of substition effects – granted, not all – can be adressed by fiscal disincentive.

To some of the earlier commentators debating how minimum wage hikes and $500k expenditures effect small vs large employers, there is an old political sleight of hand at work here that tends to undermine the whole discussion. When folks hear the term “small business” they naturally think of the local entrepreneur who has with a handful of employees, or maybe a company carrying a payroll of a dozen or so.

In political speak however “small business” means companies that employ between 500 & 1500 workers. That’s the official SBA definition.* It’s highly misleading and just loved by pols and lobbyists and think tanks. The voters (and reporters) hear “Mom & Pop Store” but what’s actually being discussed are very substantial companies that just happen to be capable of writing big checks for lobbyists and political campaigns.

My take on the $500k tax break? It is just a straight gift. Most of these companies are already spending more than enough to get the tax break. Think: “Bank error in your favor collect $500,000.” Except of course this would be “Taxpayer Error… ”

*As I recall, the number of employees at a “small business” varies by industry, and the formula is more complex than stated, but in general if you ask yourself “What size of privately held company can afford to underwrite political campaigns? ” you won’t be far off.

balconesfault
A typical example of the unreality that some people refuse to want to leave. McDonalds is clearly the villain here simply because its big, but back in the real world a small fast food joint is not the family business you wish it to be. Staff turn over is high and profit margins are slim, and the owner is not this true blue American that some liberals like to romaticize about.

You will find that being an entry level worker for a Mcdonalds is in fact a better opportunity for those that want to improve their lot in life than working for single building burger joint.

I don’t have the time right now, but folks might want to look up Ron Unz’s articles on the minimum wage posted here at TAC over the last two years. If memory serves, he dealt with many of the objections voiced here while proposing increasing the minimum wage to $15/hour.

Are you seriously citing a study that tracks unemployment from 2007 t0 2009, and blames the increase on the minimum wage? While completely ignoring the fact that this period represented the worst recession since 1929?

“Are you seriously citing a study that tracks unemployment from 2007 t0 2009, and blames the increase on the minimum wage? While completely ignoring the fact that this period represented the worst recession since 1929?”

Ken T: Are you seriously letting us all know that you didn’t bother to read the study, where you would have found that the authors state quite explicitly that they CONTROLLED FOR THAT FACT, and that teenage unemployment, in fact, rose much more sharply than general unemployment?!

Dale, you linked to a table showing minimum wage workers by industry, not by # of employees. But since 40% work at companies with less than 50 employees, we can be damned sure that well more than 40% work at companies with less than 100 employees.

@Dale Carville: “This is the moment i’d like to send Gene Callahan into the meeting with a Wall Street Journal article and an AEI study tucked under his arm…”

Oh, you are a laugh a minute, Dale. Except for the fact I am no fan of the WSJ or the AEI, and am not (necessarily, depending upon the circumstances) an opponent of increasing the minimum wage.

However, I do teach and publish in economics, so I also know that people who poo-poo the idea that raising the minimum wage could even POSSIBLY increase unemployment are contending that there is NO possibility that an increase in the price of X could ever lead to a drop in the quantity demanded of X.

Think about it this way: Paul Krugman is an educated economist of the left. If I asked him, “Paul, if done in the wrong way, or at the wrong time, or to too great an amount, could an increase in the minimum wage increase unemployment?” he would say, “Yes, of course it could. That is simply micro I.”

But when one talks to uneducated spouters-off of the left, they act as if the very idea is ridiculous. Because they uninterested in reality when it conflicts with their party line. And that is my only point here: increasing the minimum wage certainly has the potential to increase unemployment, and we should be careful about that possibility when we contemplate raising it. Otherwise, you know, why not raise it to a million dollars an hour?

Gene: Suppose I cited a study which proves that global warming is real. But when you look at the study, you find that the author bases his conclusion on a data range from January through July of one year. What would your reaction be? I suspect you would dismiss it out of hand. And you would be right to do so, since the author is obviously choosing cherry-picked data in which the external factor (seasonal change) so completely overwhelms the factor being “studied” that it is impossible to separate out anything meaningful.

The AEI study you cite is doing the exact same thing. By choosing a data set that exactly coincides with the period of the greatest labor market disruption in the last 75 years, it is impossible to extract any meaningful data about the effect of the minimum wage increases. And their claim to be doing so leads one to suspect that there was never any intention of producing an honest study.

“Gene: Suppose I cited a study which proves that global warming is real. But when you look at the study, you find that the author bases his conclusion on a data range from January through July of one year.”

And then found it warmed MUCH MORE than normal in that time? That would be significant.

And so would a study that showed that teenage unemployment increased MUCH MORE that other unemployment, even while all unemployment was increasing. This increase was quite obviously not overwhelmed at all by the general increase in unemployment.

But of course, if one already “knows” that there is “no evidence” showing that increases in the minimum wage could possibly increase unemployment, then this will all appear very mysterious.

“And so would a study that showed that teenage unemployment increased MUCH MORE that other unemployment, even while all unemployment was increasing. This increase was quite obviously not overwhelmed at all by the general increase in unemployment.”

But that assumes that, in a recession of that magnitude, during which there was no minimum wage increase, teenage unemployment would increase at the same rate as overall unemployment. To make that assertion requires having a control against which to compare the data in question. In other words, what was the effect on teenage unemployment during a similar recession in which there was no concurrent wage increase? But therein lies the rub – there is no control, because the last recession of this magnitude occurred in 1929, before enough comparable data was being collected. So you and AEI are simply asserting your belief – that without a minimum wage increase teenage unemployment would be the same as general unemployment – as a postulated fact, then using that as the basis of a study to “prove” that the minimum wage increase increased teenage unemployment. This is known as “circular reasoning”. You begin the study by stipulating the very conclusion that you claim the study “proves”.

“So you and AEI are simply asserting your belief – that without a minimum wage increase teenage unemployment would be the same as general unemployment…”

I asserted that, did I? No, Ken T, you claimed there is NO evidence that increasing the minimum wage might increase unemployment. I presented you with some evidence. Of course, it is not unambiguous: no evidence in the social science ever is. Yes, perhaps for some reason, a bust in the housing industry hit teenagers particularly hard. It is possible, even though there is no reason that comes to my mind as to why it would.

But Ken, why exactly do you find the possibility that when the price of something is raised significantly, people might buy less of it, so outlandish?

Gene: Please show where I claimed that there is no such evidence. My statement was that I have never seen any such evidence. That statement still stands, because the AEI study provides no such evidence, as I have thoroughly documented. I do not find the idea “outlandish”, but that does not make it true. It takes more than evidence-free assertions of belief to prove a point. And so far, that’s all you have.

“Yes, perhaps for some reason, a bust in the housing industry hit teenagers particularly hard. ” Now I really have to wonder if you are even trying to be serious. Are you actually trying to claim that the recession had no effects outside of the housing industry? I think there are a couple of tens of millions of unemployed people who would beg to differ. Does it seem reasonable to think that a major recession would hit teenagers harder than adult workers? It certainly does to me. But please note, I do not claim that to be a fact just because it seems that way to me.

“I asserted that, did I?” Yes, you did. Because that assertion is the entire foundation on which the AEI study is built. So by accepting the study, you accepted the underlying assertion.

“Our review indicates that there is a wide range of existing estimates and, accordingly,
a lack of consensus about the overall effects on low-wage employment of an increase in the minimum
wage. However, the oft-stated assertion that recent research fails to support the traditional view that
the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically
significant) indication of negative employment effects of minimum wages.”

“A sizable majority of the studies…” show just the effect that economic theory says we should expect. When Ken T declares he has never seen any evidence that indicates this, it only means he hasn’t looked and doesn’t want to see this evidence.

@Ken T: “That statement still stands, because the AEI study provides no such evidence, as I have thoroughly documented.”

Thoroughly documented?!! NO, you just asserted, “Hey, there was lots of unemployment: why not teenagers?” And of course I never said that the bust in the housing industry had no impact outside of it. Sheesh. I was asking why should a downturn that STARTED with a bust in the housing industry and then swept up lots of homeowners result in much higher unemployment for teenagers than for, oh, say, construction workers, who are usually not teenagers? In any case, I have now provided a link to a peer-reviewed study that shows that there is LOTS of evidence for increases in the minimum wage at least sometimes increasing unemployment.

And note again: I have endured the wrath of libertarians for noting how under the right conditions increasing the minimum wage could increase employment. My point is, “Hey, maybe it is a good idea, but don’t pooh-pooh the idea that it could cause problems, because the evidence shows it could and even serious economists of the left, like Krugman, would readily admit, ‘Of course it could, if done wrongly.'”

I think any neutral observer can easily judge who is the “evidence-free asserter” here.